Examination of Witnesses (Questions 85-99)
MR VERNON
SOARE, MRS
MAUREEN WELLEN
AND MR
CHRIS BILSLAND
MONDAY 8 JULY 2002
Chairman
85. Can I welcome you to the Committee for the
second session of our inquiry. Can I ask you to identify yourselves
for the record.
(Mr Soare) Thank you, Chairman. I am Vernon Soare,
the Policy and Technical Director of the Chartered Institute of
Public Finance and Accountancy, known as CIPFA.
(Mr Bilsland) Good evening. I am Christopher Bilsland,
CIPFA Council Member and also Vice-Chairman of CIPFA's Public
Finance Committee. I am also County Treasurer at Somerset County
Council.
(Mrs Wellen) I am Maureen Wellen, Policy and Technical
Manager at CIPFA with responsibility for capital and treasury
management.
86. Thank you. Do you want to say anything by
way of introduction or are you happy for us to go straight to
questions?
(Mr Soare) Only just to say, Chairman, that obviously
the things we put into our written evidence focus on areas where
we have some concerns or would like to see some changes. In general
we welcome the Bill but I think we do say in our introduction
that we are still disappointed that the balance of funding issue
still seems to be where it has been for a while.
Mr Betts
87. We have just heard from the Local Government
Association that the key issue for them is this matter of prudential
guidance and the sense of the Bill is that it is very much down
to yourselves as you are writing the Code of Practice. Could you
tell us a little bit about how you think that is going to work
and when will the Code be ready?
(Mr Soare) If I can ask my colleague, Maureen Wellen,
to take that question because Maureen has been quite closely involved
with the development of the Code.
(Mrs Wellen) Thank you, yes. CIPFA is developing and
maintaining the Prudential Code as a professional Code of Practice
underpinning the new system. Essentially in the new system local
authorities are going to be responsible for taking decisions on
how much they can afford to borrow and, therefore, taking their
own decisions with respect to their capital investment and their
capital programmes. The purpose of the Code we are developing
is to support the local democratic decision making by ensuring
that certain matters are taken into account during those decisions.
Firstly, that local authorities need to have regard to their strategic
plans, their asset management planning and option appraisal and
so will have an impact on service delivery. Secondly, to make
sure that in taking those decisions they take into account all
of their assets and all of their liabilities, and that is very
crucial to making sure they get proper decision making. Thirdly,
and crucially, the Code will require them to set prudential indicators
that will show that their decisions are affordable in the short
and medium term, in the long-term sustainable, or if they are
not will demonstrate quite clearly that they are not. That is
the purpose of the Code.
88. Can I just give as an example a local authority
which comes along and decides whether it is going to invest in
a new school, clearly there are tests about whether it can afford
the investment, etc., a new school is needed, but it is also going
to have to test, is it not, about how it goes about raising the
funding for that project, is it going to borrow through traditional
routes or is it going to go for a PFI scheme? Is your Code going
to deal with that sort of issue or are you assuming that those
sorts of decisions are going to be taken by Central Government
and local authorities basically are going to be pushed in the
direction of one form of capital arrangement or another?
(Mrs Wellen) The Code will support a framework where
local authorities take their own decisions and it will ensure
that matters are taken into account so that they will be able
to take a firm view as to which offers best value. However, depending
on the method by which Central Government gives support to local
government, and given that Central Government support is a matter
that local government will obviously have to take into account
in taking these decisions, even after the Bill is passed the Government
will have that potential to steer local authorities down particular
routes if they wish to. For the prudential system to work as fully
as it could it will need to be operated in tandem with a different
type of support mechanism from Government that also supports freedom
of choice as between options.
Sir Paul Beresford
89. You have touched on what seems to me to
be one of the nubs of the stranglehold that the Government has
got. On the one hand they say they are going to be free to borrow
and on the other hand they are going to have to be prudent, they
have to look at their revenue, they are looking at trying to predict
over 20 or 40 years of borrowing but that is in the hands of the
Government, it is not predictable. So if the Government squeezes
the revenue they are caught short.
(Mr Soare) In general we would agree with that. I
think we tried to say in our written evidence that it is very
important that the draft Bill looks at the capital and the revenue
together and in a sense does not separate them either intentionally
or otherwise.
90. So the Government is flag waving freedom
at the top but has a double-barrelled shotgun under the table
pointing at the knees?
(Mr Soare) Maybe as a professional body we would not
want to say yes to that but I think what you are describing—
91. That will be the trend along the way, you
think?
(Mr Soare) A freedom under the Prudential Code to
manage your own shop in terms of capital investment is not a freedom
if you have not got the revenue support behind it. In a technical
sense, yes, that is exactly right.
Chairman
92. When will the Code be ready?
(Mrs Wellen) We have a timetable that is based on
it being ready for 1 April 2004 which is, we are informed, the
first possible date that the system could be ready to go.
93. Why should it not be ready for the Bill
itself in the autumn? Surely if you are going to legislate for
a Code, Parliament has a right to see the Code at the point it
legislates?
(Mrs Wellen) At the point of legislation there will
be a very firm draft available for consultation in accordance
with the final timetable. Parliament will see a final draft. If
there was a need to accelerate the process we would need to go
back and have another look at our timetable, but that is the timetable
that we are currently working to.
94. If you are going to have something that
is fairly clear for Parliament to look at, why are you then going
to take possibly another 18 months getting the final Code into
place?
(Mr Soare) I think the issue is a draft of the code
has been published and we are road testing it currently, piloting
it with a number of authorities of different types to make sure
that it works. In terms of our timetabling, we will do what it
takes to have it in the state that Parliament requires at the
time legislation is passed. In terms of the gap, the 18 months
I do not think is significant in terms of we will not be developing
it right up until the last moment.
95. If you are developing it, you are changing
it, are you not, therefore Parliament, in a sense, will be giving
you a blank cheque. Now why should Parliament trust CIPFA when
it does not trust all sorts of other groups outside with codes
of practices?
(Mr Soare) Because I do not think it is a blank cheque.
A lot of what we are proposing has been aired publicly already.
There has been a lot of consulting with a number of other bodies
including the Audit Commission and the LGA. There is a lot in
the public domain.
96. How will Parliament be able to stop you
changing the code of practice after the Act is in place?
(Mr Soare) I think technically if the Bill refers
to the CIPFA prudential guidelines as being the authoritative
statement, in one sense Parliament is placing a lot of trust in
CIPFA, and we acknowledge that, so it is possible technically
that we could put through some changes but, as I say, any changes
that we propose would be widely consulted upon, including with
the relevant Government department.
Mr Betts
97. You are doing all this hard work and getting
this wonderful new code for local authorities to operate. Now
the Secretary of State comes along with Clause 4, does that not
completely undermine the whole thrust of developing prudential
guidelines?
(Mrs Wellen) The Government has always indicated that
if it does give these freedoms to local authorities it will wish
to have a reserve power. It has always said it is very much a
reserve power and I think the test will be in how it operates.
Also, the White Paper did give certain conditions that it was
felt that the reserve power wished to be used for whereas the
current draft of the Bill as worded would allow for it to be invoked
in any circumstance. I think we would agree with other commentators
that it would be a good idea for the current draft to be constrained,
particularly where the decision is for a Secretary of State determination.
98. Have you a form of words for the amendment
that could be put in?
(Mrs Wellen) I rather like the form which was in the
White Paper. It said broadly if a local authority had not set
a prudential limit or had breached it.
99. Can we move on to another issue and that
is the minimum level of reserves and Clause 25 is saying these
will be specified now in the legislation. I gather you are not
too keen on that idea.
(Mr Soare) I think on that particular issue, the background
and context is quite important here. I think the latest Audit
Commission figures which have come out show that approximately
90 per cent of local authorities have adequate balances, the other
ten per cent are judged by the auditors to have inadequate balances.
However, when you look at the pattern of local authority spending,
although in terms of a range, depending on type of authority,
between 20 to 40 per cent of local authorities do overspend at
individual directorate levels in year, virtually none of the local
authorities actually end up having to reduce services as a result,
i.e. they have enough in balances to cover those in year differences
against actual and budget. It is in that context, I think, that
we come at this particular point and say there is not a general
problem. There are some well publicised problems for a very small
minority of local authorities but the vast majority do manage
very prudently. When we come to the issue about reserve balances
it is in that context, specifying reserves and balances, what
we say is it is a very local decision and judgment as to at what
level balances should be set. We are revising guidance issued
in 1995 and we believe the vast majority of local authority treasurers
already demonstrate their prudence in this area. To have a central
setting of a minimum balance does seem to us to miss out the link
of the local knowledge, the local factors. Perhaps I can ask my
colleague Chris Bilsland to say something from a practitioner's
point of view.
(Mr Bilsland) Yes. It is not just that it is not needed,
it is difficult, also, to see how it could be put into practice.
Inevitably when Government set figures by form then figures produce
the lowest common denominator. I think as Vernon just said you
really need a personal knowledge of the local authority to decide
what is the right sort of level of balances. If I take my council,
for example, one of the issues I deal with at the moment is cases
which go to the Lands Tribunal. We have four cases and those figures
can be anywhere between £1,000 and £4 million. I know
precisely what figure to put into the county council's accounts
to provide for what the Lands Tribunal might say, I know that
from taking evidence from a half a dozen different places: the
legal advice, history, the degree of difficulty settling the claim.
It is very difficult to say how that sort of thing can be legislated
for. Two councils side by side could be in quite different positions
year by year. At the end of the day not only is it the case, as
Vernon said, that there is not really any evidence to say there
is a need for this legislation, the reality is that it is one
of those areas where really you need to take the decision as locally
as possible to get the best possible decision.
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